It promises to be quite a fight. At the easyJet annual general meeting next week, the founder of the low-cost airline, Sir Stelios Haji-Ioannou, is trying to overturn the bonuses that the board has awarded itself.
Right now, the City seems to be backing the board against Sir Stelios. That is a big mistake. Few genuine entrepreneurs have emerged from Britain in the last decade, but Sir Stelios is undoubtedly one. If the City doesn’t support him, the institutional shareholders will look part of the same insider club as many CEOs. There will be a backlash – and the City will only have itself to blame.
Like most major British firms, the easyJet board has got into the habit of awarding itself big bonuses. The chief executive Carolyn McCall earned £1.5m in 2011 in her first full year in the job, a sum that included £840,000 in bonuses.
A new pay deal would award ten senior executives another £8m in bonuses, so long as the targets are met. Sir Stelios, who no longer has a role at the airline but who, along with his family, still controls 38% of the shares, thinks this outrageous.
Attacking the “gravy train” at major companies, Sir Stelios issued a statement that didn’t pull any punches. “These guys are welcome to resign anytime,” he said. “I know as shareholders we could easily replace them with talented executives and experienced non-executive directors who will cost half as much in bonuses.”
He plans to vote against the pay scheme at the AGM, but he doesn’t have enough votes to defeat it. So far, the indications are that the institutional shareholders will support the board. The Association of British Insurers has supported the proposed pay scheme, and press reports suggest most big shareholders will as well. They are putting themselves on the wrong side of the argument.
In fairness, there is nothing particularly outrageous about what the easyJet board is doing. The company has performed incredibly well in what is always a tough market. Revenues rose 16.7% in the last three months of 2011 as passenger numbers rose 8.1%. The shares have not done too badly either. From around 380p at the start of 2011, they are now above 460p (although still a long way below their peak of above 700p in 2007).
The board is just doing what the management of big British companies routinely do these days, which is award themselves huge bonuses just for showing up every Monday morning and sticking around until Friday. There are many, many worse examples of executive greed in recent years.
Plenty of senior managers, from Fred Goodwin onwards, have taken huge sums while destroying the company. Nothing like that has happened at easyJet. To the board, and most institutional shareholders, it no doubt seems unfair to pick on easyJet when they are simply doing what everyone else does.
But that is precisely the point. You have to start somewhere – and this is as good a place as any. Why? Because anyone can see that executive pay has become unrealistic. A report by Income DataServices found that, during 2000-2010, CEO pay at the 350 largest quoted companies increased by 108%, yet the value of those companies rose by just 8%.
At the top of the scale, the problem is even worse. FTSE 100 bosses routinely earn several million a year in pay and bonuses, when a decade ago a million a year was a rarity. Yet during that decade the FTSE has gone nowhere – it is worth less today than it was in 1999.
Is the management of British companies twice as good as it was a decade ago? Obviously not. It is, at best, roughly the same, or arguably slightly worse – after all, even in difficult conditions, shouldn’t the stockmarkets have done better?
Shareholders have been paying more money to get professional managers to run companies without them delivering a better performance. It’s very hard to believe that anyone on the easyJet board makes such a vast difference that they need to be paid more than a million a year. It has become a kind of conspiracy. Every major company does it – so they think they can all get away with it.
Sir Stelios is precisely the right man to blow the whistle on this racket. Like him or not, he is a genuine entrepreneur – someone who has built something up from scratch, taken risks, put his neck on the line, and created a lot of wealth. He knows the difference between doing that and being appointed to run an established business, where the main task is to keep the machine ticking over, and to make sure nothing too catastrophic happens. When he points out that they are not the same thing, and don’t deserve the same kind of rewards, he speaks with authority.
The City should back him. It would only take a handful of major institutional shareholders to support him, and for the pay package to be voted down. Maybe the CEO would resign.
But so what? Sir Stelios reckons they could find someone else to do it at half the price – and he is almost certainly right. Making an example of a company as typical as easyJet would send a powerful signal that CEO pay can’t rise forever. Companies might start rewarding shareholders a bit more and executives a bit less. Easy! as Sir Stelios would no doubt put it.